14 August 2009

What The U.S. Economy Is Not.

The British newspaper, the Guardian, via Naked Capitalism notes several widely held misperceptions about the American economy:

[T]he United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials. If we look at what percentage of our overall labour force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses – well, the US ranks at or near the bottom among high-income countries....

And as both the authors of the paper and Krugman note, there is a plausible explanation for the US's low score in the small business contest: our lack of national health insurance. There are enough risks associated with choosing to start a business over being an employee, but the Europeans don't have to worry that they will go bankrupt for lack of health insurance.

A number of other alleged advantages of America's "economic dynamism" are also mythical. Most people think that there is more economic mobility in America than in Europe. Guess again. We're also near the bottom of rich countries in this category, for example as measured by the percentage of low-income households that escape from this status each year.

The idea that the US is more "internationally competitive" has been without economic foundation for decades, as measured by the most obvious indicator: our trade deficit, which peaked at 6% of GDP in 2006. (It has fallen sharply from its peak during this recession but will rebound strongly when the economy recovers).

And of course the idea that our less regulated, more "market-friendly" financial system was more innovative and efficient – widely held by our leading experts and policy-makers such as Alan Greenspan, until recently – collapsed along with our $8tn housing bubble.

On the other hand, most Americans pay a high price for the institutional arrangements that bring us these mythical successes. We have the dubious honour of being the only "no-vacation nation", ie no legally required paid time off and of course some weeks fewer actual days off per year than our European counterparts enjoy. We have a broken healthcare system that costs about twice as much per capita as that of our peer nations and delivers worse outcomes, as measured by life expectancy and infant mortality. We are near the top in terms of inequality among high-income countries and at the bottom for parental leave policies and paid sick days. The list is a long one...

There is another area where the comparison between the American and European model has serious implications for the future of the planet: climate change. "Old Europe" uses about half as much energy per capita as the US does. A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.

We estimated that the US would consume about 20% less energy if it had the work hours of the EU-15. This would have a significant impact on world carbon emissions. Furthermore, when the world economy recovers, there are a number of middle-income countries that will approach high-income status in the not-too-distant future (South Korea and Taiwan are already there). Whether they choose the American or the European model will have an even bigger impact on global climate change.

GDP growth is also predictably high in low income countries than in high income countries, mostly because the base numbers are low so small absolute gains translate into big percentage gains, and because it is easier to copy old technological advances than to come up with new ones. The European Union as a whole slightly edged out the U.S. for economic growth in 2008.

The source OECD data relied upon for the big business v. small business claim notes that:

• The United States has the second lowest share of self-employed workers (7.2 percent) – only Luxembourg has a lower share (6.1 percent). France (9.0 percent), Sweden (10.6 percent), Germany (12.0 percent), the United Kingdom (13.8 percent), Italy (26.4 percent) and 14 other rich countries all have higher proportions of self-employment.• The United States has among the lowest shares of employment in small businesses in manufacturing. Only 11.1 percent of the U.S. manufacturing workforce is in enterprises with fewer than 20 employees. Eighteen other rich countries have a higher share of manufacturing employment in enterprises of this size, including Germany (13.0 percent), Sweden (14.4 percent), France (18.0 percent), the United Kingdom (18.1 percent), and Italy (30.9 percent). Only Ireland (9.6 percent) and Luxembourg (8.5 percent) have a lower share of manufacturing employment in enterprises with fewer than 20 employees. (Raising the cutoff for a small business to fewer than 500 employees does not significantly alter the relative position of the United States.)• U.S. small businesses have a much lower share of employment than the comparisoneconomies do in the two high-tech fields for which the OECD publishes data: computer related services and research and development.• The United States has the second lowest share of computer-related service employment in firms with fewer than 100 employees (32.0 percent). Only Spain had a lower share (27.0 percent), while 13 countries with available data had a higher proportion of employment in this sector in small businesses including France (44.7 percent), Germany (48.7 percent), Sweden (49.4 percent), the United Kingdom (67.5 percent), and Italy (73.2 percent).• Similarly, the United States has the third lowest share of research and development related employment in firms with fewer than 100 employees (25.3 percent). Only the United Kingdom (22.5 percent) and the Netherlands (20.3 percent) had a lower share, while 9 countries with available data had a higher proportion of employment in this sector in small businesses including France (33.1 percent), Sweden (34.4 percent), Germany (35.0 percent), and Italy (74.8 percent).

None of this is news to me. But, the voices crying in the wilderness more often than not go unheard.

With the current regime where pre-existing conditions are covered only by group health insurance offered by an employer, the only way to get control of one's health insurance is to start a business. As I like to say, it was reason #5 for starting http://www.bergamoacademy.com because my employer (small company) doesn't offer health insurance.

There are various possible explanations as to why the U.S. is not the land of small business. Since I am not familiar with the details of how businesses work in Europe, I can only speak of how they work in the U.S.

2. Perhaps licensing of professions is more strict in the U.S. Perhaps politicians are more easily bought in the U.S. and unions, guilds, and associations pay politicians to enact regulations "in the public interest" that raise the barriers for entry by new businesses.

3. Perhaps the lack of vacation time in the U.S. gives U.S. workers no spare time to start a new business.

4. Perhaps the time-value preference of those in the U.S. is more slanted toward immediate gratification, preventing the possibility of saving up to start a business.

5. Tied into #1 above, perhaps there are more chain restaurants in the U.S., with a portion corporate-owned rather than franchised.

#2 is simply not the case; Europeans are more regulated in terms of licensing, not less.

#5 doesn't explain the lack of small businesses in non-retail sectors like manufacturing; and non-franchise dominated fields like IT consulting for businesses.

#1 possible, but unlikely. At the small business level, financing is probably easier to secure at a red tape/availability level than Europe.

#3 unlikely. Senior professionals and managers who would be most likely to leave and start businesses have much less generous hours and vacation arrangements that the bulk of European employees do.

#4 feeds into the health insurance debate; you need to have more money in the bank to support yourself while your business is ramping up in the U.S. than elsewhere. In part this is due to greater monthly health insurance bills if you go it alone (rather than a percentage of incomoe payroll tax); in part this is due to greater levels of personal (particularly mortgage debt) in many countries.